Stakeholder Pensions Explained

Stakeholder pensions were introduced as a relatively simple and flexible way to save for retirement. Although they are less prominent than they once were, many people still have stakeholder pensions accumulated personally or through a previous employer.

The value of your pension can therefore rise or fall, and investment growth is not guaranteed.

Stakeholder pensions can be held individually or provided through the workplace. You do not necessarily need to be employed to have one, which means they can also be used by people who are self-employed or not currently working.

You or, where applicable, an employer make contributions into the pension. The provider invests the money, usually in funds, and the value of your pension can change according to investment performance and the charges applied.

Like other registered pensions, contributions can usually benefit from pension tax relief, subject to the relevant rules and your circumstances.

Stakeholder pensions were designed to provide more flexibility over contributions than some older pension arrangements. You can usually change how much you pay, stop contributions and restart them later without a penalty under the stakeholder rules.

Minimum Contributions and Flexibility

One of the original features of stakeholder pensions was their relatively low minimum contribution requirement. A stakeholder scheme must accept contributions of £20 or more, although individual providers can have their own arrangements within the stakeholder rules.

Contributions do not necessarily have to be made every month. This flexibility maybe useful for people whose income varies, including the self-employed.

Stopping contributions does not normally mean closing the pension. Money already held in the plan can remain invested, although charges may continue to apply and its value can rise or fall.

Default Investment Funds

Stakeholder pensions are designed to be accessible to people who do not want to make detailed investment decisions themselves. They therefore offer a default investment option for members who do not want to select their own funds.

Depending on the provider, other investment choices are usually available. However, stakeholder pensions usually offer a more straightforward investment proposition than a SIPP, which can provide access to a much wider range of investments.

If you have an older stakeholder pension, it is worth reviewing where your money is invested rather than assuming the original fund remains appropriate for your current circumstances and retirement plans.

A defining feature of stakeholder pensions is that they must comply with government standards. These standards were intended to provide flexibility while limiting certain costs.

For stakeholder pensions started from 6 April 2005, the annual management charge is generally capped at 1.5% of the fund value each year for the first 10 years and 1% a year thereafter. Different charging provisions can apply to stakeholder pensions established earlier.

The cap does not necessarily mean a stakeholder pension will be cheaper than every modern personal pension or SIPP. Pension charges vary considerably, and some newer arrangements may have lower ongoing costs.

When comparing pensions, look at the actual charges applying to your particular plan rather than assuming that a stakeholder pension's capped charges automatically make it the lowest-cost option.

Employer Duties and Auto-Enrolment History

Stakeholder pensions have an important place in the history of workplace pension provision. From 2001, certain employers were required to provide employees with access to a stakeholder pension if they did not already provide qualifying pension arrangements. This did not mean that the employer had to contribute to the stakeholder pension.

The workplace pension system subsequently changed with the introduction of automatic enrolment from 2012. Employers are now required to automatically enrol eligible employees into a qualifying workplace pension scheme and make minimum employer contributions.

A stakeholder pension can potentially be used as a workplace pension if it meets the relevant automatic-enrolment requirements; however, employers are no longer required to designate a stakeholder pension in the same way.

Whether a stakeholder pension is appropriate will depend on your circumstances and the alternatives available. Some older stakeholder pensions may offer competitive charges and suitable investment options, while others may provide less investment choice or fewer retirement options than newer pensions.

Consider the features and costs of your existing pension alongside the alternatives available before deciding what is right for you.

Stakeholder pensions, other personal pensions and self-invested personal pensions (SIPPs) are all usually defined contribution pensions, but they can differ significantly in how they are structured.

A SIPP can offer greater investment choice and control, but may involve more complexity, risk and potentially higher charges. A personal pension may provide more investment and retirement options than an older stakeholder pension, without requiring the same level of involvement.

The right option will depend on your needs, including costs, investment choice, retirement options and how actively you want to manage your pension.

It is also worth checking which retirement options your existing pension offers. Some older stakeholder pensions may not provide facilities such as flexi-access drawdown, in which case a transfer may be needed to access these options. Before transferring, check the costs and whether you could lose any valuable benefits.

Charges, Transfers and Exit Fees

Stakeholder pensions were designed to allow members to transfer without a transfer penalty under the stakeholder rules. However, that does not mean moving your pension will always leave you financially better off.

The new pension may have different ongoing charges, investment costs or advice fees. You should also establish whether the existing pension contains any features or benefits that would be lost on transfer.

If you have several pensions, combining them can make your retirement savings easier to manage, but convenience alone is not a reason to transfer. Compare the existing and proposed arrangements carefully before making a decision.

Deciding whether to retain or transfer a stakeholder pension may involve more than simply comparing headline charges.

You may want to consider professional financial advice if you:

• Have several pensions and are considering combining them

• Are unsure whether an older stakeholder pension remains suitable

• Want to compare charges and investment options

• Are approaching retirement and considering how to take your benefits

• Need retirement options your existing provider does not offer

• Are considering moving to a SIPP or another personal pension

• Are unsure whether transferring could mean losing valuable benefits

My Pension Expert's experienced advisers can review your existing pension arrangements alongside your retirement plans and wider financial circumstances. They can explain the options available and, where appropriate, make a recommendation about how your pension could form part of your retirement planning.

This article is for general information only and does not constitute financial advice. Pension and tax rules depend on individual circumstances and may change in the future.